This is what Im talking about, the whole time the market was making new highs, it was based on economic growth picking up when in reality it wasnt going to due to an uptick in foreclosures, slower consumer spending and slowing corporate profits.

There is no goldilocks economy, there never was, and talk about a soft landing is just a joke.

07-18-07 11:09 AM

Bernanke Predicts Stronger Growth, Slowing Inflation (Update2)

By Craig Torres

July 18 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke predicted American economic growth will pick up slightly next year and inflation will gradually recede.

``The U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy's underlying trend,'' he said in testimony to the House Financial Services Committee in Washington. ``Core inflation should edge a bit lower, on net, over the remainder of this year and next year.''

Bernanke helped steer the economy through the worst housing recession since 1991, and he expects the slump in construction to continue to ``weigh'' on growth. Inflation, which for three years exceeded the preferred range of several officials, remains ``the predominant policy concern.'' Earlier today, the Labor Department said consumer prices rose 0.2 percent last month, the smallest gain in five months.

The chairman also took an additional step on consumer protection, promising tougher rules on mortgage lending.

Treasury notes were little changed after Bernanke's prepared remarks. The yield on the benchmark 10-year note declined 2 basis points to 5.03 percent at 10:26 a.m. in New York. A basis point is 0.01 percentage point.

``Even though inflation remains the predominant policy concern, you see a soft-landing outlook reiterated,'' said Jason Schenker, an economist at Wachovia Corp. in Charlotte, North Carolina. ``The Fed is not going to move anytime soon. Stay the course.''

Keeping Rates Unchanged

Bernanke and his colleagues on the Federal Open Market Committee have kept the benchmark interest rate unchanged at 5.25 percent for a year. Policy makers next meet Aug. 7, when investors and economists predict they will leave borrowing costs unchanged for a ninth straight time.

Today is the first of two days of semiannual hearings on the economic outlook and monetary policy. Bernanke appears before the Senate Banking Committee tomorrow.

Growth probably accelerated last quarter as exports and manufacturing strengthened, overcoming the drag from housing and some slowing in consumer spending, economists said. A ``strong'' global expansion, inventory re-stocking, a moderate pace of business investment and consumption should extend the expansion, Bernanke added.

Forecast Trimmed

Even so, the Fed trimmed its forecast, projecting an expansion of 2.5 percent to 2.75 percent in the final three months of 2008 from a year earlier. In February, they anticipated growth of 2.75 percent to 3 percent.

The projections, included in the semiannual monetary policy report to Congress, are the mid-range of officials' forecasts.

Gross domestic product rose 0.7 percent in the first three months of this year, which was the weakest in four years.

Inflation has receded for three straight months, with the Fed's preferred price gauge, which excludes food and energy costs, rising 1.9 percent in May from a year ago. The rate has fallen from 2.4 percent in February, which matched the highest recorded since 1995.

At least six Fed policy makers have indicated a preferred range of 1 percent to 2 percent for the core personal consumption expenditures price index. Their forecasts for 2008 would put them in that zone.

Food Prices

Bernanke said the ``sizeable'' increases in food and energy prices which have boosted inflation and ``eroded real incomes in recent months'' were ``both unwelcome developments.''

``If energy prices level off as currently anticipated, overall inflation should slow to a pace close to that of core inflation in coming quarters,'' Bernanke said.

The average price of a gallon of regular gasoline has jumped about 30 percent this year, to $3.04, according to figures from AAA. U.S. food prices climbed at a 6.2 percent annual rate through May, almost triple the pace for all of 2006, Labor Department data show. The dollar has also fallen this year, pushing up prices of imported goods.

Bernanke expressed concern that elevated inflation could alter households' expectations for inflation. That would make it tougher for the Fed to restrain prices without further increasing interest rates.

Inflation Expectations

``If inflation were to move higher for an extended period and that increase became embedded in longer-term inflation expectations, the re-establishment of price stability would become more difficult and costly to achieve,'' Bernanke said.

A gauge of inflation anticipated by investors rose to 2.49 percent this week from 2.37 percent at the start of the year. The measure is derived from differences in yields on five-year Treasury inflation-protected securities and regular notes.

Employers added 132,000 workers in June, with the unemployment rate holding at 4.5 percent for a third month, close to the lowest level in six years. The amount of capacity in use at the nation's factories in June also increased, to 81.7 percent, the highest since October.

Fed officials forecast unemployment would average 4.5 to 4.75 percent in the fourth quarter, and 4.75 in the final quarter of next year.

Democrats in Congress have goaded the Fed into tightening its oversight of mortgage lending after foreclosures jumped to the highest in five years this year. Fed policy makers have acknowledged that lending standards slipped when Americans took out $2.8 trillion in new mortgages from 2004 to 2006, the largest home-loan binge on record.

Pilot Program

The Fed and state regulators yesterday announced a pilot program to collaborate on supervision and enforcement of non- bank subprime lenders. In June, regulators issued stricter guidelines on subprime loans. Bernanke took an additional step in today's testimony, pledging to codify some of the guidelines into a rule.

``We plan to exercise our authority under the Home Ownership and Equity Protection Act to address specific practices that are unfair or deceptive,'' Bernanke said. ``I expect that the Board will propose additional rules under HOEPA later this year.''

Sales of previously owned homes in the U.S. fell in May to the lowest level in almost four years. Purchases fell 0.3 percent to an annual rate of 5.99 million, the National Association of Realtors said last month. The supply of unsold homes jumped to a record. Residential construction has fallen for six straight quarters.

`Remain Sluggish'

``The pace of home sales seems likely to remain sluggish for a time, partly as a result of some tightening in lending standards and the recent increase in mortgage interest rates,'' Bernanke said.

Bernanke opened his testimony with remarks on the benefits of transparency in central banking. Bernanke commissioned a subcommittee on communications headed by Vice Chairman Donald Kohn about a year ago. So far, the subcommittee hasn't detailed its plans.

Bernanke supported a numeric inflation target as a Fed governor. Yesterday, he reiterated his ``strong support of the dual mandate'' which says the Fed must achieve both stable prices and full employment.

The 53-year-old Fed chief served on the Fed Board from 2002 to 2005 before becoming chairman of President George W. Bush's Council of Economic Advisers. He took over from Alan Greenspan at the Fed's helm in February last year.

I don't know whether Baron pays you to do these "cut and paste" posts on ET in order to keep website "activity" up, or whether or not you are the GREATEST "Monday Morning" quarterback known to mankind - - - especially since you admit that you are not a TRADER.